The Fed and the BOJ recently announced their respective monetary policy decisions. And if you missed them and need a quick rundown on the most important details and how their respective currencies reacted, then today’s write-up is just for you!
The FOMC Statement
1. Unanimous decision not to hike
As widely-expected, the Fed voted unanimously not to hike this time around. As such, the current target range for the Fed Funds rate is still between 1.00% – 1.25%
2. Fed’s economic forecasts
I noted in my latest economic roundup for the U.S. that GDP growth has been impressive and was hitting the Fed’s forecast of +2.2% year-on-year to boot. However, I questioned if Q3 U.S GDP growth can maintain the pace, given the damage inflicted by the hurricanes.
The Fed was apparently thinking about that as well since Fed Chair Yellen warned during her opening statement that “In the third quarter … economic growth will be held down by the severe disruptions caused by Hurricanes Harvey, Irma, and Maria.”
However, Yellen was quick to put a positive spin on her disappointing comment by saying that the U.S. economy will recover when she said the following:
“As activity resumes and rebuilding gets underway, growth likely will bounce back. Based on past experience, these effects are unlikely to materially alter the course of the national economy beyond the next couple of quarters.”
Yellen also chose to focus more on signs that business investment is picking up as well as stronger-than-expected exports this year, which is why the Fed upgraded its growth projection for 2017 from +2.2% to +2.4%.
The growth forecast for 2018, meanwhile, was unchanged at +2.1% while the forecast for 2019 was revised slightly higher from +1.9% to +2.0%.
With regard to the labor market, Yellen happily noted that jobs growth averaged around 185K jobs in the three months to August. She refered to this as a “solid rate of growth” since it’s above the 100K needed to keep up with the working-age population growth.
Similar to her assessment and outlook on GDP growth, however, Yellen warned that “the hurricanes severely disrupted the labor market in the affected areas, and payroll employment may be substantially affected in September.”
Even so, she maintained her upbeat attitude by noting that “such [negative] effects should unwind relatively quickly.” And she ended by saying that the Fed expects “that the job market will strengthen somewhat further.”
I quipped in my latest U.S. economic roundup that the Fed has a problem with inflation since the headline year-on-year reading for the PCE price index was the slowest in 10 months in July while the core reading was the weakest in 19 months.
Yellen pointed that out as well, when she said that “the 12-month change in the price index for personal consumption expenditures was 1.4 percent in July, down noticeably from earlier in the year. Core inflation– which excludes the volatile food and energy categories–has also moved lower.”
And because of this weakness, the Fed was forced to downgrade its core inflation forecast for 2017 yet again, this time from +1.7% to +1.5%. The core inflation forecast for 2018 was also downgraded again, from +2.0% to +1.9%.
The headline inflation forecast for 2017, meanwhile, was unchanged but the headline forecast for 2018 was revised lower from +2.0% to +1.9%.
Despite another round of downgrades, Yellen repeated her mantra that the Fed believes that “this year’s shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. For example, one-off reductions earlier this year in certain categories of prices, such as wireless telephone services, are currently holding down inflation, but these effects should be transitory.”
As such, they “are not of great concern from a policy perspective because their effects fade away.” And given the Fed’s belief that tighter labor conditions will eventually push wages higher, as well as signs that “inflation expectations remain reasonably well anchored,” Yellen reiterated the Fed’s expectations that inflation will climb higher over time, which is why the Fed’s headline and core forecasts for 2019 were unchanged at 2.0%.
2. Hiking path for 2017 and 2018 unchanged
Since the Fed thinks that the factors dampening inflation “should be transitory” and since the Fed thinks that inflation will still climb over time, the Fed maintained its projected path for the Fed Funds Rate.
As highlighted above, the Fed still expects the Fed Funds Rate at 1.4% by the end of the year. And using 1.25%, which is the upper bound of the current target range, then that means the Fed is still open to one more 25 bps hike this year.
For 2018, the Fed still projects the Fed Funds Rate at 2.1%, which means three more hikes.
The forecast for 2019 was revised lower from 2.9% to 2.7%, however, which means only two hikes in 2019 instead of three.
3. 2017 “dot plot” essentially unchanged
Given the recent dovish rhetoric from some Fed officials, some market players were expecting the Fed’s so-called “dot plot” to show that some Fed officials have backed off on voting for a hike.
However, the “dot plot” revealed something very interesting. Just compare the September dot plot with the dot plot from the June FOMC statement.
As marked above, the September “dot plot” shows that 11 Fed officials think the midpoint of the target range should be at 1.375%, which means they are open to one more hike. One is super optimistic and thinks that the midpoint should be at 1.625%, which means he or she wants one more hike. Four Fed officials meanwhile, think that the midpoint should be at 1.125%, which means that they won’t vote for another hike.
In contrast, there were four super optimists back in June, 8 were open to only one hike, and four who didn’t want to hike further.
The three super hawks who later joined the consensus who only want one more hike is obviously a sign that recent developments have weighed on the Fed.
What’s surprising, however, is that nobody joined the “don’t want more hikes” club. And while the “dot plot” doesn’t distinguish between voting and non-voting FOMC members, the fact that the “don’t want more hikes” club only has four members means that they’re still the minority no matter how you slice it. As such, if the Fed finally does decide to hike this year, then it’s gonna have enough hawkish members to push through with it.
4. Balance sheet unwind in October
The Fed announced during the June FOMC statement that it will start unwinding its balance sheet “this year.” And in the September FOMC statement, we learned that “this year” means this October.
Other than that, the Fed didn’t really change anything. And if you’re interested on the details, I already detailed the Fed’s plans for unwinding its balance sheet in my write-up on the June FOMC Statement, so read up on that here or you can go ahead and read the Fed’s official Policy Normalization plans here.
Yellen did stress during the presser that “changing the target range for the federal funds rate is [the Fed’s] primary means of adjusting the stance of monetary policy.”
She then said that the Fed’s “balance sheet is not intended to be an active tool for monetary policy in normal times. We therefore do not plan on making adjustments to our balance sheet normalization program.”
However, she reiterated the Fed’s statement from June that “the Committee would be prepared to resume reinvestments if a material deterioration in the economic outlook were to warrant a sizable reduction in the federal funds rate”
A journalist asked Yellen for specific shocks to the economy that would force the Fed to stop and reverse its new balance sheet policy while another journalist asked for hypothetical scenarios that may force the Fed to do the same, but Yellen didn’t really adress the issue, referring only to the “material deterioration in the economic outlook”
5. The Greenback shot higher
Yellen was relatively upbeat, even though she warned that jobs growth likely slowed in September and Q3 GDP likely took a hit because of the hurricanes.
And while the Fed was forced to downgrade its inflation forecasts yet again, Yellen reiterated that the Fed thinks inflation will continue to climb, which is why the path of the Fed Funds Rate remained unchanged, so the Fed is still on track for one more hike this year.
And more importantly, the “dot plot” showed that nobody defected to the “don’t want more hikes” club, which means the four doves (I’m sure Kashkari is one of them) are still the minority. As such, if or when the Fed does finally decide to hike, it will have the numbers to do so.
Given all that, it’s not very surprising that the CME Group’s FedWatch tool shot higher from around 50% to over 70% because of the FOMC statement.
And since rate hike expectations spiked, so too did the Greenback.
The BOJ Statement
1. No policy changes (as usual)
As expected (and as usual), the BOJ decided to maintain its current monetary policy, so the policy rate is still at -0.10% while the stock of commercial paper and corporate bonds will be maintained at ¥2.2 trillion and ¥3.2 trillion respectively.
As for its asset purchase program, the BOJ reaffirmed that, in keeping with its so-called “QQE With Yield Curve Control” framework, the BOJ “will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent.”
No set amount was given, but (as usual) the BOJ said that it “will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen.”
2. Upbeat outlook, but new member dissents
As usual, the BOJ presented an upbeat assessment and outlook on the Japanese economy. Japan, for example, has been “expanding moderately” and Japan’s economy “is likely to continue its moderate expansion.”
The BOJ couched its upbeat outlook on its findings that overseas economies “have continued to grow at a moderate pace on the whole,” which is helping Japanese exports.
Also, business fixed investment “has been on a moderate increasing trend with corporate profits improving” while consumer spending “has increased its resilience” because of improving labor market conditions.
With regard to inflation, the BOJ was noticeably more downbeat since it noted that “Inflation expectations have remained in a weakening phase.”
In contrast, the BOJ sounded more upbeat during the July BOJ statement when it said that there were tentative signs that the downtrend (since spring 2015) in medium to long-term inflation expectations may finally end
Even so, the BOJ remained hopeful when it said that:
“The year-on-year rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations”
Interestingly enough, newly appointed BOJ Member Goshi Kataoka dissented with regard to inflation.
To quote from the BOJ statement itself:
“Mr. G. Kataoka opposed the description on the outlook for the CPI, considering that, although the year-on-year rate of change in the CPI was likely to increase for the time being reflecting developments in crude oil prices and foreign exchange rates, the possibility of the rate of change increasing toward 2 percent from 2018 onward was low at this point.”
Looks like we’ve got a dove right there!
3. BOJ still has an easing bias
During the presser, BOJ Governor Kuroda was asked if the BOJ is open to easing further. And Kuroda replied as follows:
“The BOJ will patiently continue accomodative monetary policy to achieve 2 percent inflation. As we mention in our policy statement, we will also adjust policy as needed looking at economic, price and financial developments. As such, we will take further monetary easing steps if necessary.”
In simpler terms, the BOJ still has an easing bias, but it currently sees no need to budge from its current monetary policy.
4. The event was a dud (as usual)
There used to be a time when the BOJ statement could really rock the yen. Those days are over it seems since the yen barely reacted to the BOJ statement, even though fresh BOJ Member Kataoka expressed his dovish views. Nowadays, it seems only risk sentiment, North Korea, and bond yields seem to drive the yen’s price action.